Monsoon Side Effects, No. 3 Coca-Cola Sales

A boy held an umbrella as waves broke over a promenade near the Arabian sea in Mumbai, July 25.

The monsoon’s impact is far reaching in India. From traffic chaos and potholed roads, to severe and fatal floods, not much is spared from the rains as they travel up the country. This year they did so in record time.

But the monsoon brings advantages too.

Finance Minister P Chidambaram this week, in his otherwise gloomy assessment of the economy, tried to focus attention on the benefits to farmers of the good monsoon.

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What he didn’t mention, however, was the knock on impact on consumer spending and manufacturing output of plentiful monsoon rains.

Even though agriculture contributes just 14% to the country’s gross domestic product, nearly half of India’s population works in the farming sector. When the rains fall, they’ve got cash to spend.

“A good rainfall usually has a high correlation with the spending sentiment of the rural population and a moderate trickledown effect on their urban counterparts as well,” says Debopam Chaudhuri, vice-president of research at BluFin, a Mumbai-based consultancy that publishes a monthly Consumer Confidence Index in India.

The index is based on surveys of 4,000 consumers in 18 urban centers. This month’s results show consumers in India are still wary about the overall economic climate and employments outlook, even in the midst of good monsoon rains.

Here are a few ways the monsoon affects consumer spending in India.

Utility Vehicles, Motor Cycles and Tractors: When farmers have spare cash as a result of a good monsoon, they often aspire to buy sports utility vehicles such as jeeps, which can accommodate more passengers and have ample space for drums of fertilizer and diesel. The SUVs are also good for the dirt tracks, which crisscross much of rural India. Lower down the spending scale, farmers opt for motor cycles, which in many ways are as handy on the narrow and bumpy tracks.

Tractor sales also usually rise after a good rain-fed harvest. The machines are not only used for crop cultivation, but a host of other jobs such as hauling farm produce to market.

Electrical Appliances: About half of the revenue of consumer goods such as television sets, radio and CD players usually comes from spending in rural areas in India.

Mobile phones, a must have for farmers who use the devices for data on weather conditions and crop prices.

Sales of such items usually rise immediately after the October-November harvest of summer crops such as rice, sugarcane and cotton. The harvest coincides with the Hindu festival season, when gifts are exchanged.

Fertilizer, Pesticides and Seeds: It’s likely that executives in fertilizer companies and chemical manufacturers track the monsoon as eagerly as farmers. Bountiful and well-distributed rains always lead to more crop cultivation in the country’s rain-fed farmlands, leading to higher usage of fertilizers, seeds and pesticides as farmers expand the area of land on which they sow. Inevitably, sales take dive whenever rains are erratic, as many farmers prefer to leave their fields fallow rather than invest.

June is one of the biggest months for sales of Coke in India, according to a spokesman for Coca-Cola in India.

But this year rains arrived early and had crossed the country by June 16 washing away roads and making transportation of the beverage difficult. As a result volumes rose by just 1% in the second quarter of the year, reversing a 20% growth in the year-earlier quarter, when the monsoon arrived late.

Gold and Silver: Farmers usually prefer to stash most of their savings in gold or silver jewelry. Many of them don’t like opening bank accounts because of the hassle of documentation. Their preference for gold is also because it is traditionally seen as a store of value and customarily gifted to brides. About 70% of the gold demand in India, the world’s largest consumer, comes from rural areas. When there’s more money around, gold sales go up.

Bank Lending Rates: Good monsoon rains are likely to increase the supply and bring down the price of food staples. The price of food is one of the biggest contributors to overall inflation. If inflation comes down, the central bank would have room to cut lending rates and stimulate industrial growth. “We have had very high food inflation in the last two years. Therefore a good monsoon this year would work towards tempering this inflation rate. If this comes down, then Reserve Bank of India may consider lowering lending rates, provided other conditions such as foreign exchange markets are stable,” said Madan Sabnavis, chief economist at CARE Ratings a, Mumbai-based credit rating agency.

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